Leading Indicators Remain Stubbornly Tepid
In almost every direction we turn, we see optimism mounting over a mid-2021 economic reacceleration. Unfortunately, it seems we will have to wait at least another month for that optimism to make their way into leading economic indicators in a major way.
On Thursday, March 18, the Conference Board released its February 2021 report detailing the latest reading for its Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special ettention to the LEI, as it has a forward looking tilt to it. The index grew for the tenth month in a row, up 0.2% month over month in February, a decrease from January’s 0.5% pace.
While this print still suggests future economic growth ahead, it fell short of expectations that had begun to price in an economic reacceleration on the back of improving vaccination trends. The Conference Board did make special note that factors which may prove to be transient, such as bad weather and related supply chain disruptions, did affect several component indexes. Moreover, it stated that the recently passed $1.9 trillion fiscal stimulus plan, a similarly large economic growth factor to vaccine progress, was likely not yet fully priced into the LEI’s value.
Six of the ten components grew in February, while three declined and one remained flat. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread led the way among positive contributors. Building permits, average weekly manufacturing hours, and average consumer expectations for business conditions detracted from the composite’s growth, while manufacturers’ new orders for nondefense capital goods excluding aircraft held steady.
As seen in the chart below, despite some small head fakes, the monthly change in the index has generally sloped downward since its initial bounce off of the 2020 lows. This signals the index has been increasing at a decreasing rate, as COVID-19 mitigation measures have prevented a full-fledged resurgence. We expect this trendline to turn meaningfully upward once a durable reopening begins to gain traction.
“In recent months, financial markets have been agressively pricing in a strong second leg to this economic recovery,” said LPL Financial Chief Market Strategist Ryan Detrick. “We are still waiting for much of the economic data to confirm the move, but believe it should not be far off given the extremely promising vaccination trends and large fiscal package that was just recently passed. We think it is a matter of when there is a surge in US GDP growth, and not if there will be a surge.”
We continue to believe that vaccinations are the key to a sustained recovery and distribution trends have been truly remarkable recently. The most at-risk segment of the population is largely vaccinated already and at this point, more people in the United States have been vaccinated than have contracted the virus. We now have three vaccines approved for emergency use authorization, and President Biden projects that we will have enough vaccine supply for every adult American by late spring.
Furthermore, we have increased confirmation that vaccines appear to be effective at preventing transmission as well as symptoms. While growth of variant strains does present a risk, we believe the overwhelming majority of evidence points toward a promising second leg of this economic recovery, which we believe justifies a tilt toward cyclical opportunities over defensive investments in portfolios.
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